Recent Decisions

SMU Law Review

Volume 22 | Issue 5

Article 14

1968

Recent Decisions

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RECENT DECISIONS

Community Property

Divorce -

The Community

Na-ture of a Military Retirement Fund

Gilberto Mora sued for divorce from Flora Mae Mora after fourteen years of marriage. At the time of trial Gilberto, a member of the armed forces for twenty-five years, was eligible for retirement. On the basis of his service he was to receive upon retirement a monthly income for life; the retirement plan provided that Gilberto would forfeit his rights to such income if he died while in the service or was dishonorably discharged. The trial court concluded that this retirement fund was not the community property of the spouses. Held, reversed: A husband's interest in a military retirement plan is a presently vested property right, regardless of the for-feiture clause, and that portion of the retirement fund accumulated dur-ing the marriage constitutes community property of the spouses. Mora v.

Mora, 429 S.W.2d 660 (Tex. Civ. App. 1968), error dismissed w.o.j.

-Earlier Texas cases recognized the conflict between jurisdictions which considered retirement or pension funds a gift from the employer to the employee upon retirement and jurisdictions which considered such funds a type of compensation earned during the period of employment.1 The Texas courts came to the conclusion that the fund represented property earned by the employee during the period of employment.! Under article 4619' such funds were then classified as community property of the spouses.

In recent years in Texas a conflict focused on whether a forfeiture clause in the retirement fund agreement denied the employee a vested property right in the fund. If the forfeiture clause were a condition precedent, no property rights would vest in the employee prior to his retirement,' and thus no community property rights would arise prior to retirement. But if the clause were a condition subsequent, a vested property right would arise in the money accumulated in the retirement fund; the employee would have a vested interest subject to divestment, and this interest would con-stitute community property acquired at the time an amount of money was placed in the fund and credited to the employee.

In Mora the San Antonio court of civil appeals took the position that a forfeiture clause was a condition subsequent, for "[o]nly rights in exist-ence can be forfeited." The court stated that no federal statute or regu-lation divested it of power to make necessary orders "affecting the

retire-'Lee v. Lee, 112 Tex. 392, 247 S.W. 828 (1923); Kirkham v. Kirkham, 335 S.W.2d 393 (Tex. Civ. App. 1960); McCamey v. Hollister Oil Co., 241 S.W. 689 (Tex. Civ. App. 1922), aff'd, 115 Tex. 49, 274 S.W. 652 (1925).

'See Herring v. Blakely, 385 S.W.2d 843 (Tex. 1965), noted in 19 Sw L.J. 370 (1965);

Kirkham v. Kirkham, 335 S.W.2d 393 (Tex. Civ. App. 1960).

xTm. Rv. Cirv. STAT. ANN. art. 4619 (1960) provides that all property acquired during

marriage except by gift, devise or descent shall be community property.

4See A. CosBri, CoNTRAcTs § 628 (1952).

5

id.

RECENT DECISIONS

ment benefit as part of the property settlement in a divorce action."' The situation in Mora was contrasted with the situation in Allen v. Allen,' where the court was deprived of this power by federal statute.

From the express language in such retirement plans, the agreement con-templates that the employee has a property right in the fund and that his right may be lost, forfeited, or divested if the employee performs some specified act in the future. From the standpoints of equity and the word-ing of the majority of forfeiture clauses in retirement plan agreements, an employee's interest in such funds should be regarded as a vested right sub-ject to divestment and, therefore, as the community property of the spouses prior to retirement. The problem the courts must now resolve is how to divide this interest upon divorce when the employee will not re-ceive any income from the fund until some future date.'

T.W.W.

Constitutional Law

-

Juvenile Proceedings

-

Due

Proc-ess for the Delinquent

The Juvenile Court of Harris County, Texas, found the defendant, Debra Fay Leach, aged twelve, to be a delinquent child.' The charge of delinquency was based on the fact that she had run away from her home on several occasions. Debra Fay had been placed in the detention ward of the juvenile authorities at the request of her parents and had remained there until trial. During her incarceration, and before counsel was ap-pointed for her, Debra Fay was interrogated by a probation officer. The child was not told of her right to have an attorney with her during these questioning periods, nor was she told of her right to remain silent. At trial the interrogating officer testified, on the basis of Debra Fay's statements, that the child was "endangering her morals by the runaways and what took place during the runaways."' Held, reversed: Proceedings in juvenile cases which may lead to commitment must meet the requirements of due process, including written notice of the specific charge, notification to the child and his parents of the child's right to be represented by counsel re-tained by them (or appointed), and application of the constitutional

priv-' 63 S.W.2d 314 (Tex. Civ. App. 1962).

'In Kirkham v. Kirkham, 335 S.W.2d 393 (Tex. Civ. App. 1960), the court affirmed the trial court's allowance of a money judgment against the husband for the wife's share of the retire-ment fund, although the husband had no present right to income from the fund. In the instant case the court noted that the trial court could enter a decree requiring the husband to pay the wife a share of the monthly payments "if, as, and when he receives them." 429 S.W.2d at 663. Because such retirement funds often constitute substantially all the assets of a married couple, this latter approach appears to be the more equitable.

ITEx. REv. Crv. STAT. ANN. art. 2338-1, S 3(f) (Supp. 1967), providing that a child may be delinquent when he "habitually deports himself so as to injure or endanger the morals or health of himself or others."

'Leach v. State, 428 S.W.2d 817, 820 (Tex. 1968).

ilege against self-incrimination. Leach v. State, 428 S.W.2d 817 (Tex. Civ. App. 1968).

In determining specifically that the interrogation and testimony of the probation officer denied Debra Fay the constitutional essentials of due process, the court applied the standards established in In re Gault.' There, the United States Supreme Court decided that the same principles appli-cable to adults in criminal proceedings must be enforced in cases involving juveniles, even if the proceedings are before a juvenile court and only de-termine the status of "delinquency." The Court stated that such proceed-ings, "which may lead to commitment to a state institution, must be re-garded as 'criminal' for purposes of the privilege against self incrimina-tion. To hold otherwise would be to disregard substance because of the feeble enticement of the 'civil' label-of-convenience which has been at-tached to juvenile proceedings."

The statute under which Debra Fay Leach was committed was part of the Civil Statutes of Texas.' Courts have traditionally used a different standard of due process in "civil" proceedings under the theory of parens

patriae," or the philosophy that juvenile proceedings are not "in the nature

of a criminal trial, but constitute merely a civil inquiry ... looking to the treatment, reformation, and rehabilitation of the minor child."' One in-road toward recognizing the need for constitutional protection in a ju-venile proceeding was the Supreme Court's decision in Kent v. United

States," which held that "assistance of counsel was essential to the validity

of a transfer of jurisdiction by a juvenile court to a district court."' The Texas court in Leach acknowledged that all the safeguards essential to due process in! a criminal trial are required in a juvenile proceeding, and found them lacking in this case. The testimony of the probation officer should have been excluded from the proceedings on the basis that "[i]nculpatory admissions made prior to a waiver of the privilege against self -incrimina-tion, or opinions based thereon, are not admissible."'0 In addition, because no counsel was timely appointed to safeguard appellant's rights and be-cause the child was not warned of her constitutional privileges, the court felt that the proceedings constituted "clear violations of federal due pro-cess."'1 So holding, the court implicitly recognized that the delinquency statute is penal in nature and, thus, must be treated as penal in its enforce-ment.

R.A.K.

'387 U.S. 1 .(1967), noted in 28 LA. L. REV. 492 (1968), and 47 NEB. L. REv. 558 (1968).

4387 U.S. 1, 49-50 (1967).

5 See note 1 supra. A concurring opinion preferred to base the decision on the "obvious

uncon-stitutionality of that portion of the statute here in issue." 428 S.W.2d at 821.

e Sovereign power guardianship over persons under disability. For a general discussion, see Note,

Criminal Procedure--Due Process in Juvenile Delinquency Proceedings, 28 LA. L. REV. 492 (1968). 'In re Holmes, 379 Pa. 599, 109 A.2d 523, 525 (1954). The court went on to say: "Their

purpose is not penal but protective---aimed to check juvenile delinquency" and to protect a po-tential criminal during his adolescent life. Id.

8383 U.S. 541 (1966). 'Note, supra note 6, at 495.

10428 S.W.2d 817, 820 (Tex. 1968). The court cited Miranda v. Arizona, 384 U.S. 436 (1966). 11428 S.W.2d at 821. The court noted, id. at 820, that according to In re Gault, 387 U.S. 1,

36 (1967), "(A] probation officer is also an arresting officer and cannot act as counsel for the child."

RECENT DECISIONS

Corporate Law

Stockholder's

inspection

Rights

-

Tra-,ditional

State Right Enforced by Federal Court

After the corporation repeatedly refused to grant Stern his stockhold-er's right to inspect corporate books and records, Stern brought suit' in federal district court' in Pennsylvania, the state of incorporation, request-ing an order to permit inspection. The inspection right was authorized by a Pennsylvania statute.' The district court dismissed the action on the ground that because the relief sought was mandamus, the court was pre-cluded from exercising jurisdiction under the All Writs Act.' The Court of Appeals for the Third Circuit affirmed.' Held, reversed: A federal dis-trict court has jurisdiction to grant equity relief in a diversity action by a stockholder against a corporation, where the stockholder seeks to inspect the corporate books and records as authorized by state statute, even where such state statute is labeled "mandamus." Stern v. South Chester Tube Co.,

390 U.S. 606 (1968).

At common law a stockholder was entitled to inspect the books and records of a private corporation at a reasonable time and place, and for a proper purpose.' Enforcement of this inspection right was generally ac-complished by mandamus.' In the instant case, both lower courts inter-preted the relief sought by Stern as in the nature of mandamus. A line of cases holding that the All Writs Act denied jurisdictional power to federal courts to issue mandamus where it was the only relief sought led the two courts to conclude that they were denied such power in the present case.

The Supreme Court viewed Stern's complaint as basically one seeking equitable relief and not mandamus. In concluding that the lower courts erred in interpreting the nature of the relief sought, the Court distin-guished most of the cases relied upon as suits against a public official, whereas the present case involved a private party. The Supreme Court found only one prior case, Knapp v. Lake Shore R.R.,s in which it had held a federal court without jurisdiction to issue a writ of mandamus against a private party. But the Court distinguished Knapp on the ground that it was a suit at law in which mandamus was expressly sought and which was brought at a time when law and equity were divided. Because mandamus was restricted to actions at law, the Knapp court was unable to grant such relief. The subsequent merger of law and equity eliminated this limitation

'Stern was a resident of New York and held $10,000 or more of stock; South Chester Tube Company was incorporated in Pennsylvania--thus federal court original jurisdiction was invoked under 28 U.S.C. S 1332(a) (1964), where diversity of citizenship and an amount in controversy

in excess of $10,000 were both met.

'Stern v. South Chester Tube Co., 252 F. Supp. 329 (E.D. Pa. 1966).

'PA. STAT. ANN. tit. 15, S 2852-308B (1958).

4 28 U.S.C. § _{1651 (1964). Federal courts are authorized to issue "all writs necessary or}

appro-priate in aid of their respective jurisdictions and agreeable to the usages and principles of law." ' 378 F.2d 205 (3d Cir. 1967).

6 18 C.J.S. Corporations S 502 (1939); W. FLETCHER, PRIVATE CORPORATIONS § 2214 (perm. rev. repl. 1967).

718 Am. _{JuR. 2D Corporations §§ 444-49 (1965); W.} FLETCHER, supra note 6, 5 2251.

Man-damus is a writ issuing from a court of competent jurisdiction and directed to a person, officer, corporation, or inferior court, commanding performance of some particular duty resting on the person to whom it is sent. 55 C.J.S. Mandamus §§ 1, 2 (1939).

s197 U.S. $36 (1905).

on the federal court's power to grant equitable relief. Pennsylvania statutes set out both the stockholders' right to request inspection of the books and records. and the right of state courts to issue a compulsory judicial order for enforcing such rights. The Supreme Court felt that the Pennsylvania statutory relief, although labeled "mandamus," was actually equitable in nature. The Court reasoned that since Stern had no adequate remedy at law, a federal court could have jurisdiction to grant the relief sought under its equity power. The issue of whether such result would be ob-tained even if there were no similar state remedy in statutory form was ex-pressly avoided.

By the Stern decision, the Supreme Court has recognized the jurisdic-tional power of federal courts to grant equitable relief to stockholders in a diversity action where rights of inspection are refused by the corporation, in the event that state statutory provisions authorize such relief. Stern makes available an old remedy in a new forum. It is not a surprising deci-sion, because it complements an established structure of federal regulation of various corporate activities."

T.E.S.

Jurisdiction -

Foreign Corporation Doing Business as a

Partner

Plaintiff was injured when the automobile in which he was a passenger collided with a truck driven by an employee of a partnership doing busi-ness in Odessa, Texas. After moving from Texas to Ohio, plaintiff sued Freedom Newspapers, Inc., a California corporation and controlling part-ner in the Odessa partpart-nership, for damages resulting from the accident. The suit was brought in an Ohio federal district court, where jurisdiction was based upon diversity of citizenship. Freedom Newspapers moved for a change of venue to a Texas federal district court, alleging that the Texas court was the proper venue,' and that personal jurisdiction over Freedom Newspapers could be obtained pursuant to the Texas long-arm statute.!

Held, motion granted: Owning a controlling interest in a Texas

partner-ship constitutes sufficient contact with Texas to subject the non-resident partner to the jurisdiction of the Texas courts. Myers v. Freedom

News-papers, Inc., 274 F. Supp. 93 (N.D. Ohio 1967).

Historically, jurisdiction over foreign corporations was determined by

9PA. STAT. ANN. tit. 15, § 2852-308B (1958). 'oId. tit. 12, S 1911 (1967).

" See, e.g., A. BROMBERG, SECUrITIEs LAW (1967), for a discussion of federal regulation of fraud in the securities field.

t28 U.S.C. S 1391 (a) (Supp. 11, 1965-66): "A civil action wherein jurisdiction is founded only on diversity of citizenship may, except as otherwise provided by law, be brought only in the judicial district where all plaintiffs or all defendants reside, or in which the claim arose." See also id.

RECENT DECISIONS

such tests as corporate presence and corporate consent.! However, in the landmark case of International Shoe Co. v. Washington,' the Supreme Court discarded previous jurisdictional tests and established a less restrictive standard. To be amenable to service under this test, a foreign corporation need only have "certain minimum contacts" with the state so that the ex-ercise of jurisdiction would not offend traditional notions of fair play and substantial justice.4 In formulating the "minimum contacts" standard, the Court focused on the necessity of balancing the interests of the plaintiff, defendant corporation, and the forum state.! Once due process limits are defined, a state must still enact a "long-arm" statute authorizing "mini-mum contacts" jurisdiction." The applicable Texas statute' provides that if a foreign corporation fails to appoint a resident agent, the Secretary of State may be served as the agent of the foreign corporation whenever the foreign corporation is "doing business" in Texas. This statute was designed to exploit maximum jurisdictional rights consistent with the Federal Con-stitution."5

"Minimum contacts" litigation involving a corporate partner operating a partnership in another state has been sparse. This is probably due to the fact that until recently many corporations were statutorily forbidden partnership status." Furthermore, even when authorized by statute, the right of a corporation to be a partner was very restricted, often depend-ing on the charter of the corporation."2 Other related partnership situations have been litigated to a greater degree. In Schenstrom v. Continental

Ma-chines, Inc.,"3 a federal district court held that a corporation was not "doing business" in a foreign state merely because it owned an interest in a sep-arately operated partnership located in the forum. It is significant to note that jurisdiction was refused even though the separately owned partner-ship was completely dominated by the foreign corporation.

Although for jurisdictional purposes individuals and corporations can-not always be treated alike,' the "minimum contacts" jurisdictional test is clearly applicable to both non-resident individuals and corporations.' Thus,

"See, e.g., International Harvester Co. v. Kentucky, 234 U.S. 579 (1914); Pennoyer v. Neff, 95 U.S. 714 (1877).

4

See, e.g., Lafayette Ins. Co. v. French, 59 U.S. (18 How.) 404 (1855). See also Note, The

Application of the First Amendment to Long Arm Jurisdiction, 21 Sw. L.J. 808 (1967).

5 326 U.S. 310 (1945).

eld. at 316.

'F. JAMEs, CvrL PROCEDURE 640 (1965).

'Atwood Hatcheries v. Heisdorf & Nelson Farms, 357 F.2d 847 (5th Cit. 1966). See generally VanDercreek, Texas Civil Procedure, Annual Survey of Texas Law, 21 Sw. L.J. 155 (1967).

9

TEx. REV. CIV. STAT. ANN. art. 2031b, S 4 (1964). The Secretary of State can be served as the agent of the foreign corporation whenever the foreign corporation is doing business in Texas, defined to include: (1) "entering into contract . . . with a resident of Texas to be performed in whole or in part by either party in this State," (2) "the committing of any tort in whole or in part" in Texas, or (3) any other act which "may constitute doing business."

5

eAtwood Hatcheries v. Heisdorf & Nelson Farms, 357 F.2d 847 (5th Cir. 1966).

"1See, e.g., Merchants' Nat'l Bank v. Wehrmann, 202 U.S. 295 (1906).

"aSee, e.g., Mervyn Inv. Co. v. Biber, 184 Cal. 637, 194 P. 1037 (1921); Consolidated Furni-ture Mfrs. v. Goldstein, 140 Cal. App. 563, 35 P.2d 627 (1934); Humble Oil & Ref. Co. v. Strauss, 243 S.W. 528 (Tex. Civ. App. 1922).

137 F.R.D. 434 (S.D.N.Y. 1947).

" E.g., a corporation is subject to suit in the state of its incorporation, even though it may not

be engaged in business or carrying on any activities there.

cases dealing with jurisdiction over out-of-state individual partners have some bearing on whether an out-of-state corporate partner should be sub-ject to the jurisdiction of a particular state. For example, in Bedford v.

Dillinger" "minimum contacts" were satisfied solely because the

non-resident individual defendants were partners in a Texas partnership, even though they were not physically present within the state." In Stoner v.

Higginson' service upon an individual non-resident defendant was upheld

because the defendant's partnership was engaged in business in the juris-diction at the time service was made.

The threshold question in Myers was whether the Texas court could ob-tain personal jurisdiction over the defendant foreign corporation based solely upon its partnership interest-activity. The defendant was not con-ducting its primary business in Texas; thus, jurisdiction had to be based on its partnership interest. The court determined that the defendant's partnership, which it controlled, was sufficient business activity within the

state to satisfy the requirements of due process. Applying traditional part-nership principles, the court reasoned that the corporation was doing busi-ness in Texas because each partner acts as the agent of the other and the activities of one are imputed to all.

Myers v. Freedom Newspapers, Inc., seems to exemplify the steadily

ex-panding jurisdiction over foreign corporations, evidenced by broader con-stitutional decisions and implemented by far-reaching long-arm statutes. It is unclear, however, whether the decision in Myers can be extended to other situations involving out-of-state corporations. In reaching its deci-sion, the court in dicta reiterated the rule of Cannon Mfrs. v. Cudahy

Packing Co.,"' which holds that the ownership of a foreign subsidiary is not,

in itself, sufficient contact with that state to subject the parent corpora-tion to jurisdiccorpora-tion therein.' From an academic viewpoint, it might be urged that this distinction should be discarded. If the Myers situation con-stitutes sufficient contact with a foreign state, the exercise of jurisdiction over a foreign parent corporation whose only contact with the forum state is the ownership of a subsidiary therein seems equally reasonable. However, it is unlikely that this will become the law in the near future, for historical precedent, which dictates that corporations and partnerships should be treated differently for jurisdictional purposes because shareholders, unlike partners, have limited personal liability, will be difficult to overcome.

A.W.Z.

310 F.2d J83 (5th Cir. 1962).

1" The partnership agreement provided for payment of certain commissions to a partner. The

former partner, suing for commissions, was allowed to acquire jurisdiction over non-resident former partners by citation upon the Secretary of State of Texas, where the non-resident partners actually participated in the partnership business in the state.

1.316 Pa. 481, 175 A. 127 (1934).

19267 U.S. 333 (1925). In Cannon the substantive issue did not arise out of the activities of the subsidiary.

" Cases subsequent to Cannon have maintained that when a separate corporate identity is not retained the parent is subject to the jurisdiction of the foreign state. See, e.g., Skupski v. Western

RECENT DECISIONS

Labor Law

Life of Grievance Procedure After Contract

Termination

The union notified Kingsport Publishing Corporation that it was un-equivocally terminating the labor agreement at the contract termination date. Some eight months after the contract expired, and during negotia-tions with the union for a new agreement, the company discharged a union employee for refusal to carry out a foreman's instructions. The union sought to initiate grievance proceedings as set out in the expired contract. Kingsport refused to follow this grievance machinery, but exhibited a willingness to pursue the matter in negotiations. The union declined to ne-gotiate and filed an unfair labor practice charge with the National Labor Relations Board under section 8 (a) 5' of the National Labor Relations Act. The Board determined that because grievance handling is a mandatory sub-ject of bargaining,' the company was guilty of an unfair labor practice by reason of its unilateral action and petitioned the court for enforcement of its order so holding. Held, enforcement refused: Kingsport had a right to decline to follow the previous grievance procedure where the prior union agreement had expired, negotiations for a new contract had not been concluded, and the grievance procedure had not become a part of the es-tablished operational pattern. Kingsport Publishing Co. v. NLRB, 69 L.R.R.M. 2193 (6th Cir. 1968).

That grievance procedure is a mandatory subject of bargaining is well established,3 and the facts in Kingsport reflected the company's willing-ness to negotiate on this matter. Therefore, the point of contention cen-tered around the availability to either party of unilateral change or uni-lateral action concerning a grievance.

In NLRB v. Katz" the Supreme Court held that "an employer's unilateral change in conditions of employment under negotiation is ... a violation of Section 8 (a) 5."' The Board has further pronounced that employment prac-tices of the employer may become conditions of employment and, as such, may survive the termination of an agreement." In Kingsport the union and the Board, following the dictates of Katz, maintained that a unilateral change in a mandatorily bargainable item was automatically a violation of section 8 (a) 5.

The company based its defense upon two theories. The first was that the union termination letter exceeded section 8 (d)' requirements and consti-tuted a waiver of their right to bargain about any change regarding a con-dition of employment. The court disposed of this argument as being

unnec-' 29 U.S.C. § 1$ 8 (a) 5 (1964): "'It shall be an unfair labor practice for an employer-to refuse to bargain collectively with the representatives of his employees .... "

See Fibreboard Paper Products Corp. v. NLRB, 379 U.S. 203 (1964); Marine Workers Union

v. NLRB, 320 F.2d 615 (3d Cir. 1963), cert. denied, 375 U.S. 984 (1964). 3 ld.

'NLRB v. Katz, 369 U.S. 736 (1962).

3 Id. at 743.

eShell Oil Co., 149 N.L.R.B. 283 (1964) (the practice of contracting out occasional main-tenance work on a unilateral basis).

129 U.S.C. S 158(d) (1964).

essary to a decision. The second company defense centered upon the prem-ise that grievance machinery is based upon contract. Since no contract ex-isted, the company urged that no grievance machinery was in effect. This theory was based on

J.

a contractual matter and that the company could not be compelled to bitrate where it was not bound by an arbitration agreement. Because ar-bitration was the final step in the grievance process which the union in-sisted upon, the company argued that it could not be required to go through grievance procedure. The court, recognizing the contractual basis of arbitration, nevertheless did not base its decision on the second conten-tion of the company.

The Kingsport court followed the reasoning of an Eighth Circuit deci-sion, NLRB v. Frontier Homes Corp.,' where it was held: "Expired con-tract rights affecting mandatory bargaining issues, therefore, have no effi-cacy unless the rights have become a part of the established operational pat-tern and thus become a part of the status quo of the entire plant opera-tion."'" The Sixth Circuit in Kingsport reasoned that the expiration of eight months without a single grievance, being processed through the pre-viously existing machinery was sufficient for a finding that such machinery was not a part of the "established operational pattern."

By refusing enforcement of the Board's order the court has given addi-tional instruction to the Board in its dealings with the effect of contract provisions in expired labor agreements. This instruction should strengthen the rights of parties to an expired labor agreement to disregard provisions set out in such agreement, even though mandatorily bargainable, where the provisions can be shown not to be a part of the status quo of the plant operation.

R.B.S.

Labor Law

Remedies

Order to Employer To Grant

Checkoff

The National Labor Relations Board found that H. K. Porter Company had violated section 8 (a) (5) of the National Labor Relations Act' by failing to bargain in good faith with the union on the issue of a checkoff provision. The Board ordered the company to bargain collectively" and the court of appeals enforced the order,8 indicating that the company would not be permitted to refuse a checkoff provision "for some concocted

rea-'John Wiley & Sons v. Livingston, 376 U.S. 543 (1964). 'NLRB v. Frontier Homes Corp., 371 F.2d 974 (8th Cir. 1967).

'Old. at 981.

149 Stat. 451 (1935), as amended, 29 U.S.C. S 158(a)(5) (1964).

' 153 N.L.R.B. 1370 (1965).

aUnited Steelworkers of America v. NLRB, 363 F.2d 295 (D.C. Ci.), cert. denied, 385 U.S. 851 (1966).

RECENT DECISIONS

son not heretofore advanced."' The union and the company disagreed as to the interpretation of the circuit court's decree of enforcement. While the union interpreted the decree as obligating the company to agree to a dues-checkoff provision, the company felt that it was required only to dis-cuss the possibility of such a provision. In spite of these divergent interpre-tations the court denied a union motion to clarify the decree for the pur-pose of inviting the Board to test the competing ideas with further investi-gation.' The Board accepted the arguments of the company and declined to institute contempt proceedings. The union again asked the circuit court to clarify its enforcement decree. The subsequent clarification and remand of the case to the Board for further proceedings indicated that the Board would be warranted in ordering the company to grant the checkoff provi-sion "in return for a reasonable concesprovi-sion by the union.'" Held, supple-mental order issued: An order obligating the employer to grant checkoff

but not requiring the union to give a reasonable concession is warranted where the employer has repeatedly violated section 8 (a) (5) and its oppo-sition to granting checkoff is based solely on a desire to thwart the con-summation of a collective bargaining agreement. H.K. Porter Co., 172

N.L.R.B. No. 72 (1968).

The circuit court felt compelled to clarify its original decree because it disagreed with the Board that the company's interpretation of its obliga-tion was correct. In the court's opinion, the company could not "purge itself of its bad faith and meet its Section (d) obligation [to bargain col-lectively] by agreeing simply to negotiate on alternatives to a checkoff."' For this reason and to establish guidelines for the Board, the clarification discussed the circumstances under which checkoff could be imposed as a remedy for bad faith bargaining. These circumstances included the two violations of section 8(a) (5) and the acknowledgment by the company that it had no business reason for refusing the checkoff. Thus it would have been proper for the Board to order the company to grant this pro-vision in return for a reasonable union concession on wages or insurance, which were the two remaining issues in dispute. In addition, the court stated that "in an appropriate case the Board could simply order the com-pany to grant a checkoff."'

In Porter two policies of the National Labor Relations Act were in con-flict, i.e., freedom of contract and the guarantee of the right of employees to bargain collectively. The court reasoned that in such a case the Board must seek the remedy which would best effectuate one of the policies with the least cost to the other policy. In certain instances, therefore, ordering an employer to grant checkoff may be the only way to guarantee the em-ployees' right to bargain collectively, regardless of the intrusion into free-dom of contract.

4United Steelworkers of America v. NLRB, 389 F.2d 295, 297 (D.C. Cir. 1967). 5 Id.

aid. at 299. 'Id. at 298. aId. at 300.

SOUTHWESTERN LAW JOURNAL

It is significant that the Board in its second order followed the guidance of the court; it is even more noteworthy that the Board went to the limit of the judicial directive by not requiring a reasonable concession from the union. The Board apparently rejected the court's distinction between ap-propriate cases for an absolute remedy and cases warranting an order of reciprocal concessions. The basis for this rejection was that "to permit [the company] to hold out for some 'reasonable concession' by the Union in return for the checkoff... would imply that the [company] is now be-ing ordered to surrender a position that it had legitimately maintained."' The Board concluded that such an implication would be contrary to the finding that the company's opposition was solely designed to thwart the consummation of the collective bargaining agreement.

Utilization of an absolute order eliminates the confusion which would have been caused by attempts to distinguish the "appropriate case" men-tioned by the court from less extreme cases. Indeed, it is difficult to con-struct a more extreme example of a section 8 (a) (5) violation than Porter. Moreover, it is unlikely that a remedy requiring reciprocal concessions would have been more effective in breaking the cycles of impasse between the parties, unless the Board has dictated the substance of the union's con-cession, which would be beyond its statutory authority.

B.A.N.

TaxatiOn

Partnerships

Partner May Be an Employee

Under Section 119

Armstrong, manager of the Armstrong Ranch, was provided by the partnership which owned the ranch with a home for himself and his fam-ily, most of his groceries and utilities, maid service, etc. In addition, he re-ceived a fixed salary for his services and a share of the partnership profits, of which he owned a five per cent interest. On his tax returns for the years

1960, 1961, and 1962, Armstrong failed to report the value of the house,

groceries, etc., and the Internal Revenue Service assessed a deficiency for their value. After paying the deficiency, Armstrong sued for a refund, contending that these emoluments were properly excluded from his income under section 119 of the Internal Revenue Code of 1954, which allows an employee to exclude the value of meals and lodging furnished by his em-ployer under certain circumstances The Service rejected this contention, reasoning that a partner cannot be an employee of the partnership. The district court granted the government's motion for summary judgment.

Held, reversed: Section 707 of the 1954 Code, which permits a partner to

engage in transactions with the partnership as though he were an outsider, views the partnership as a separate entity, and a partner may be an

em-9H.K. Porter Co., 68 L.R.R.M. 1337, 1338 (1968).

' The circumstances are if the meals or lodging: (I) is furnished for the convenience of the employer and (2) is on the business premises of the employer. See INT. REv. CODE of 1954,

5

RECENT DECISIONS

ployee of this entity, just as he may be its debtor or creditor. Therefore, the government was not entitled to judgment as a matter of law.

Arm-strong v. Phinney, 394 F.2d 661 (5th Cir. 1968).

Although fought on the battlefield of tax law, Armstrong is a skirmish in the old dispute over whether a partnership is an "aggregate" of the ownership interests of the partners, with no separate existence of its own, or is a separate "entity." Though widespread adoption of the Uniform Partnership Act in recent years has led to something of a truce on the question in substantive partnership law, "aggregate" and "entity" are still fighting words in tax law.' Like the Partnership Act, the Internal Revenue Code utilizes both theories," but the Code is indefinite on which theory should govern in several troublesome areas and thus has created some con-fusion among the courts."

Armstrong illustrates the importance of resolving these uncertainties.

To be entitled to exclude meals and lodging under section 119, the partner must be an employee of the partnership.' Under the aggregate concept of partnership, he cannot be an employee, for the partner rendering services to the partnership is merely serving himself, like a single proprietor run-ning his business. If the partnership is considered an entity, however, the partner logically can be an employee of this entity, just as a stockholder can be an employee of his corporation.

Under the 1939 Code the courts of appeals and the Commissioner agreed that a partner could not exclude from his income the value of meals and lodging furnished him by the partnership, because the partnership and the partners were one and the same legal entity." Since no tax was imposed upon the partnership itself, the courts reasoned that the partnership could not be regarded as a separate entity for tax purposes." The tax court, how-ever, refused to adopt this reasoning and held instead that the partner could exclude meals and lodging.'

In 1967 the court of claims decided the first case to arise under the 1954 Code involving exclusion of meals and lodging furnished by a partnership to a partner.' That court, with little discussion, followed the appellate deci-sions under the 1939 Code and ruled that the managing partner of a ranch cannot exclude the value of food and lodging furnished by the partnership

2See 6 J. MERTENS, _{THE LAw or FEDERAL INCOME TAXATION} S 35.01 (1957).

' E.g., the imposition of tax on the individual partners rather than on the partnership is an aggregate approach, whereas the requirement that computations of partnership income and elections affecting its computation must be made by the partnership reflects the entity concept. Compare INT. REV. CODE of 1954, § 701 wth id., § 703.

' Compare Commissioner v. Whitney, 169 F.2d 562, 567-68 (2d Cir.) (Clark, J.), cert. denied, 335 U.S. 892 (1948) (tax law adopts the common law concept of the partnership as an aggregate

of individuals) with Commissioner v. Lehman, 165 F.2d 383, 385 (2d Cir.) (L. Hand, J.), cert.

denied, 334 U.S. 819 (1948) (Congress adopted the common law view that a partnership was an entity for most purposes).

5INT. REV. CODE of 1954, § 119.

'Commissioner v. Robinson, 273 F.2d 503 (3d Cir.), cert. denied, 363 U.S. 810 (1959); United States v. Briggs, 238 F.2d 53 (10th Cir. 1956) (per curiam); Commissioner v. Doak, 234

F.2d 704 (4th Cir. 1956).

'Commissioner v. Doak, 234 F.2d 704, 708 (4th Cir. 1956).

'E.g., George A. Papineau, 16 T.C. 130 (1951), not acquiesced in, 1952-2 Cum. BuLL. 5.

'Wilson v. United States, 179 Ct. Cl. 725, 376 F.2d 280 (1967) (per curiam).

while he lives on the ranch.' Reasoning that a partnership "is not a legal entity separate and apart from the partners,"" the court failed to discuss what effect differences between the 1939 and 1954 codes should have upon the applicability of previous decisions to cases arising under the 1954 Code. In Armstrong v. Phinney1" the Fifth Circuit did consider the changes made

by the 1954 Code and in the process departed from the previous decisions. The court noted that when the 1954 Code was enacted, the entity aspects of a partnership were more fully recognized than in the 1939 Code by the addition of section 707, which enables a partner to engage in transactions with the partnership as though he were an outsider.1 This section permits the partnership to pay a partner a salary and to deduct it from the partner-ship income like the salary of any employee."' However, section 707 never specifically refers to a partner as an employee, and his status as a member of that category is questionable under other Code provisions.1' Neverthe-less, the Fifth Circuit ruled that section 707 is sufficient authorization for judicial recognition of an employer-employee relationship between a part-ner and his partpart-nership for purposes of section 119.a

Because the appeal was from a summary judgment the scope of the

Armstrong decision is uncertain, for the court's discussion goes no further

than its ruling that the government was not entitled to judgment as a mat-ter of law. Clearly, the result of the case conflicts with the 1967 court of claims decision and with decisions of other circuits under the 1939 Code, but these cases may be distinguishable on their facts. The prior cases which refused to allow exclusion of meals and lodging have involved partners owning controlling interests in the partnerships,1' whereas Armstrong owns only a five per cent interest. Not even under section 707 of the 1954 Code may a partner owning a fifty per cent interest in the partnership engage in transactions with the partnership as an outsider." Had Armstrong owned a larger interest, therefore, the reasoning behind the decision would not have been available. Thus the case could be read as no more than a rec-ognition by the court that partnerships often grant to employees small partnership interests even though these mini-partners may have no more voice in the management and control of the partnership than an employee without such an interest.

10

11

ld. at 752, 376 F.2d at 296.

125394 F.2d 661 (5th Cir. 1968). "'Treas. Reg. § 1.707-1 (1956) provides:

A partner who engages in a transaction with a partnership other than in his capacity as a partner shall be treated as if he were not a member of the partnership with respect to such transaction. Such transactions include . . . the rendering of services by the partnership to the partner or by the partner to the partnership.

Noting the difficulties in this area, the Senate Committee on Finance said in its report: "Because of its simplicity of operation, the 'entity' rule has been adopted by the House and your committee." S. RP. No. 1622, 83d Cong., 2d Sess. 92 (1954); cf. H.R. RaP. No. 2543, 83d Cong., 2d Ses. 59 (1954).

"INT. REV. CODE Of 1954, § 707(c); see note 13 supra.

'See, e.g., id., % 101(b)(3), 105(g), 401(c), 3121(d). 'a 394 F.2d at 663-64.

"'E.g., Commissioner v. Robinson, 273 F.2d 503 (3d Cir.), cer. denied, 363 U.S. 810 (1959) (husband and wife operating hotel as partners); cf. cases cited note 6 supra.

RECENT DECISIONS

However, the Fifth Circuit did not discuss fully the countervailing con-siderations. Although it may be clear that a partnership is considered an entity under section 707, Congress indicated when it adopted that provi-sion that a partnership cannot be considered an entity in all areas.' Thus there may well be a distinction between permitting a partner to receive a salary from the partnership (on which he pays taxes) and permitting him to exclude from his income the value of meals and lodging furnished by the partnership. If their value may be excluded, the partner has his living expenses paid tax-free, and in addition, the tax on his distributive share of partnership income is reduced, for the partnership is entitled to deduct the cost of the meals and lodging from the partnership income, thereby reducing all of the partners' taxable income. This double tax benefit sug-gests that tax considerations applicable to exclusions from a partner's in-come should be somewhat different from those applicable to transactions between the partner and the partnership which result in taxable income to one or the other.

R.S.S.

In its report on the 1954 Code, the Conference Committee observed:

No inference is intended, however, that a partnership is to be considered as a separate entity for the purpose of applying other provisions of the internal revenue laws if the concept of the partnership as a collection of individuals is more appropriate for such provisions.

H.R. REP. No. 2543, 83d Cong., 2d Sess. 59 (1954). In a footnote the court considered this diffi-culty and rejected the argument that section 119 is a provision where the aggregate concept is more appropriate than the entity view. 394 F.2d at 663 n.8. However, the court's rather cursory treatment of this issue is considerably less than convincing.